U.S. Companies Poised for M&A Shopping Spree

U.S. companies are poised to launch a spending spree linked to the recent tax overhaul, hoping to add to growth through mergers and acquisitions, according to a new survey by Ernst & Young LLP.

The professional services company surveyed some 500 executives last month of companies with over $500 million in annual revenues and found that 73% plan to “accelerate” deal making strategies, according to the report.

“Companies are going to be more confident due to the tax reform,” said Bill Casey, EY Americas Vice Chair of Transaction Advisory Services. “You have a sweetener here.”

Companies are even willing to dig deeper into their coffers, Mr. Casey said. Some 48% of companies are “willing to pay more for acquisitions in light of tax reform,” according to the survey.

The total value of announced U.S. deals reached $394.5 billion as of March 19, according to Dealogic. That’s up 56% from $253.4 billion notched during the same period last year and the most for the time span dating back to at least 1995. The number of transactions, however, has slipped 15% to 2,064 from last year.

The rise in deal value may be due to pent-up demand from last year as deal makers sat on the sidelines waiting for the passage of the tax legislation, Mr. Casey said. Washington in December approved a sweeping tax overhaul that slashed the corporate tax rate to 21% from 35%.

The new tax law is set to bring other benefits to the U.S. economy, the Ernst & Young survey said. Three quarters of responding executives said their companies are likely to expand manufacturing efforts in the U.S., while 66% expect to pass some of the tax savings to customers. Some 89% of respondents say their companies plan to “enhance compensation,” due to the tax reform.

Lawmakers also opened the door for the return of profits hoarded in foreign subsidiaries by launching the transition to a territorial tax system. Companies now are required to pay a one-time tax of 15.5% on overseas profits in cash and other liquid assets, and have the option to then bring those funds home.

Companies surveyed by Ernst & Young said that on average they will return some 8% of overseas earnings because of the new legislation.